Technology mergers and acquisitions continue to drive higher earnings multiples over businesses producing comparable cash flow but aren’t operating within the technology industry. For anyone who can remember the dot com boom and bust of the 90’s, sky high valuations for tech companies are nothing new. However, as technology continues to be a cost-effective way for replacing human labor, entrenched legacy brands are routinely looking to grow through acquisitions and often times, the technology sector is the most attractive. And with truly high-quality technology businesses being hard to build from the ground up, there is tremendous time value of money savings that come from acquiring a smaller company that already put in the hard work to turn nothing into something. This strategy can often be at the forefront of a company’s M&A strategy, especially if they are tying to catch up to their main competitors. While old legacy brands often see the most benefits from a technology business acquisition, the world’s largest tech companies in the world often make acquisitions based primarily on user growth metrics.
When looking at entrenched legacy brands like Walmart, you can see how the fundamental shift in their M&A strategy to bolster their digital presence through the acquisitions of online brands like Bonobos and Jet.com. Technology companies operating within the middle market are well positioned to capture shareholder value through strategic exits and with institutional buyers like Walmart willing to pay a premium for quality, there has never been a better time to sell a middle market technology business.
So why do technology businesses command higher multiples than most other industries? In most cases, it comes down to scalability. While most traditional bricks and mortar businesses are limited by their geographical location, a technology business by definition typically has exponential earning potential because they can serve customers across the United States and other countries, 24 hours per day, 7 days per week. A manufacturing business that can only produce products 8 hours per day simply doesn’t carry the same value as a technology business that has the ability to generate revenue 24/7/365. Websites don’t get tired. Websites don’t show up to work late. Websites don’t get sad. Websites don’t need lunch breaks. A highly-valuable website platform has the ability to capture market share in hundreds of different markets with access to billions of global consumers without ever missing a beat. That exponential potential is the primary factor that drives higher earnings multiples for technology-based businesses.
With that said, there will always be dozens of factors that materially impact the valuation for technology business transactions, but ultimately, technology businesses usually offer more opportunities for growth compared to businesses that operate outside of the technology industry and that has consistently helped drive transaction value in tech M&A.
Additionally, corporate synergies can also help drive transaction value in tech M&A, especially for older legacy brands that are trying to evolve from old bricks and mortar strategies to digital infrastructure strategies. And while some tech companies might be reluctant against the idea of being acquired by a faceless multi-national corporation, the “eat or be eaten” rules are even more relevant for tech companies. For example, as Snapchat quickly emerged from nowhere to be the most popular app among teens, Facebook attempted to acquire Snapchat to combat the loss in users moving from one platform to another. Snapchat famously declined the offer to be acquired by Facebook and that arrogance resulted in Facebook duplicating the only feature that made Snapchat special. With a very short period of time, Facebook saw huge gains in daily user metrics on their Instagram Stories product, which took Snapchat from being one of the most popular apps to an app that now struggles to survive as a going concern. There are very instances where it’s not wise to accept a premium offer for your technology business and the team at Smith Holland Advisors can help you navigate the complex process of securing the best value for your business.
While timing is everything when it comes to M&A deals outside of the tech industry, these rules apply even more so to technology mergers and acquisitions as what’s popular today in tech is never guaranteed to last. Today’s tech trends can quickly become yesterday’s fads and selling your technology business at the wrong time can lead to huge variances in the final sale price. At Smith Holland, our M&A advisors specialize in crafting bespoke value stories for technology companies that illustrate the inherent value within many of the intangible assets that can be difficult to value. Everything from your customer database to the global scalability of your business model will be used to drive transaction value and with over a decade of experience in advising on technology M&A transactions, the Smith Holland deal team knows that finding the right buyer is the key to securing the best price. We know that any potential acquirer will conduct their own internal analysis to determine if it’s more cost-effective to build instead of buy, which is why we create customized exit strategies that highlight the synergistic values of acquiring your company. Since there will be different synergies for different acquisition candidates, we always use a custom-tailored value story for each potential buyer that we target.
In summary, real numbers still matter. Having the “world’s best” technology doesn’t mean anything if the revenue model behind the business isn’t viable for the long-run. While net losses don’t matter as much for Silicon Valley startups like Uber that only exist with recycled investor money to sustain the continued net losses, most private companies don’t have the benefit of operating at a loss for years on end. At Smith Holland Advisors, we deal in hard numbers and our website business brokers make sure all of our clients know that real numbers are what the valuation is primarily based on.
444 W Lake Street
Chicago, Illinois 60606
32 London Bridge Street
London SE1 9SG, UK
13155 Noel Road
Dallas, Texas 75240
1055 W. Georgia Street
Vancouver, BC V6E 3P3